Impax Asset Management Group Plc (IPX) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Impax Asset Management Group plc Half Year Results Investor Presentation. [Operator Instructions]. The company may not be in a position to answer every question received during the meeting itself, but the company can review the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Founder and CEO, Ian Simm. Good afternoon to you, sir.

Good afternoon, everybody, and welcome to the interim results for Impax. So I'd like to take you through 3 sections just to highlights of the update, followed by financial update and then an outlook statement at the end. So hopefully, about 30 minutes of presentation and then Q&A for as long as you like, really. So just in summary, many of you have seen us before, but for those of you that are not aware of what Impax does, we've been a specialist investment manager focused on what we call the transition to a more sustainable economy for over a quarter of a century since I started the business in 1998. This idea of the transition to a more sustainable economy is at its heart a catalyst idea around industrial revolution, the switch towards cleaner, more efficient goods and services, which is a worldwide trend, and industrial revolution that's presenting many opportunities to make money. Impax has been at the forefront of investing in this quite complicated area. There's lots of technology change, lots of regulatory change that leads to complexity, which is quite often not priced into securities, and that's where the investment opportunity lies. So as a brand which is established over a couple of decades in this area, then we do find that we are at the forefront of the competitive landscape. We're finding that given political pressures in the U.S. against areas like clean energy that a number of our erstwhile competitors have been pulling out, worried about political backlash if they've got stances on climate change, for example. And so our competitive position has continued to improve in recent months. And we focused very much on designing and implementing a scalable business model in asset classes that have got the potential to grow quite considerably. So I'll explain about that in a bit more detail as we go through. Next slide, please. So business highlights for the 6 months to the end of March. I think the critical point is that after a period of being behind generic markets given the very unusual circumstances around the Magnificent 7 stocks and AI, in particular, that was a story for 2024, but that's now really largely behind us for the moment in stock market terms, and our investment performance has improved considerably with over 70% of our assets under management outperforming calendar year-to-date. There's positive momentum towards our strategic priorities. For example, in fixed income, we've been building through acquisition, and we closed our second recent acquisition in that area on the 1st of April, so just after this period. We've maintained very tight control of costs and been able to adjust our cost base as flows have been against us in the near term and -- or the most recent past rather. And as we look for the prospects for the next 6 to 12 months or so, we have had a challenging first half to our year, but we do think that things are improving. Next slide, please. So summary of the financials for that half year period. So I won't go through all the numbers here, but broadly speaking, if you look at our financials and compare them to previous periods, then revenue and profits down moderately. The cash reserves remained pretty unchanged compared to 12 months ago. We are a business on an annual cycle. So when we pay out dividends and bonuses to staff, then the cash does drop, but year-on-year, pretty flat. And we've announced an interim dividend of 4p per share. More on that in a moment. So on the right, we did promise at our AGM in March that we would update investors around our capital allocation policy. So right at the top of the priorities remain investment in the business through seeding new products and also making acquisitions. The dividend policy remains unchanged, so paying out at least 55% of our adjusted profit after tax. And at the moment, we are steering investors to expect a dividend, which is down on last year. So a sort of rebasing of the dividend, if you like. And as a result of that, we're also going to be paying out proportionately less in final dividend with the ratio between interim and final increasing on previous years, hence, the relatively small reduction in the interim dividend compared to 12 months ago. And then the final component of the capital allocation update is the buyback program, which we've introduced as a one-off, so GBP 10 million earmarked for buyback of our own shares with an expectation that will be completed by the end of the calendar year. Next slide, please. So a few slides with some data on following. So what these shows is the waterfall explaining how we've got to our GBP 25.3 billion over the last 12 months. So the period we're reporting on is the right-hand side of this chart after the green bar, if you like. And you'll see there that the SJP outflows, that was the loss mandate from St. James's Place, which has been widely flagged since it was announced in December and closed in the end of February. So that has really exacerbated a position which in the previous 6-month period was similar. In other words, outflows worse than inflows, meaning that we've shrunk assets in terms of money coming in and out. And the market movement in the most recent 6 months was worse than it was 6 months prior. So that's taken us down another step in assets under management. Next slide, please. So as I mentioned, the market has changed considerably since the start of this calendar year. At the end of December last year, about 37% of the S&P 500 by value was in just 10 stocks, which is pretty exceptional. I think possibly the highest has been in recent decades. That situation has reversed and the percentage now, I think, is down at close to 30% compared to more normal levels of between sort of 20% and 25%. So that very narrow market has meant that it's been very difficult in calendar 2023 and 2024 for active investment managers to outperform the generic index. So that situation has reversed. And as I've mentioned already, over 70% of our assets outperforming to the end of April, and I think that outperformance has carried on in May. Next slide, please. So a couple of slides following showing our investment performance. So this first page is our largest equity products or strategies. And what we're showing here is the calendar performance in the dark blue versus the generic benchmark in the orange. So if we look at the leader strategy on the left, which is our largest thematic equity product in 2021, that was comfortably ahead of the market. But then the last 3 years, '24 calendar years rather '22, '23 and '24, it's been behind. And for the end of March year-to-date, it's pretty much flat, although outperforming in February and -- sorry, in April and May. So this is the illustration of the point I've just made, Global Opportunities, which is the largest of the core equity strategies that we run a pretty similar story, so ahead of the market in '21, behind the market in '23 and '24 and pretty flat to the end of March and again, ahead in April and May. By contrast, on the next slide, then in fixed income, we've had fairly much the opposite story. In other words, ahead of markets in '22, '23, '24 and pretty much flat or slightly behind the end of March. So at a glance, this illustrates the diversification benefits to us in terms of the relative popularity of these complementary asset classes. So hence, the desire to build up our fixed income capability in assets under management. Next slide, please. So the breakdown of our assets under management by different categories is shown here. So I think the -- not too much to report, but broadly speaking, if you look at the left-hand side, so the assets under management according to the type of product, you can see a drop between the orange and the blue bar into the recent period as our St. James's Place mandate dropped away and that core equities meant a reduction in the relative percentage in core equities with thematic equities proportionately increasing as a result on a smaller base. And that's also reflected in the middle table -- middle section with the U.K. dropping with the St. James's Place mandate disappearing and the other parts of the world, certainly EMEA and North America increasing pro rata. Asia dropped as well because we did lose a couple of institutional accounts in the Asia Pacific region. Next slide, please. So again, more data to back up the message. So the blue bar again is the most recent period, so 6 months of net inflows, anything to the left of the vertical line means outflows. And so St. James's Place has quite a dramatic loss as that client dropped away. I think the critical message here in terms of the feature is that in the middle, our main distribution partner, BNP Paribas, demonstrated quite specifically smaller net outflows period-to-period. So that's a very positive trend, and that's not quite turned around to positive, but even better in the most recent quarter. And so yes, the composite here is a breakdown of our net outflows, but the trend certainly for distribution partners in Europe is positive. Next slide, please. So strategic priorities here, really a pretty simple business idea. We intend to scale up on investment strategies where we have capacity in listed equities, in fixed income, where we've been building through acquisition and in our private equity business, which is focused on European renewable energy assets. We are working very hard to enhance and optimize our distribution channels with direct sales resources in Europe and North America and distribution partnerships in many other places, including Japan, Australia, Latin America. We are also very focused on cost and efficiency in the business. And so that's a little bit more detail to come on that in subsequent slides, but the cost focus has allowed us to protect our profits to some degree against falling revenues in the period just reported. Next slide, please. So a bit more detail on some of those slides now. So in the distribution area, we have set up distribution now with direct service in Scandinavia. We've opened an office in Denmark. We have established a new product on our usage range in new markets. And with the fixed income funds and accounts broadening considerably, we've got much greater capabilities there. And I think I've mentioned all these points now apart from the last one, which is that in Canada, we've seen quite attractive and encouraging inflows through our distribution partners in what is quite a well-established market for us with a couple of billion dollars under management already and strong prospects for the future. Next slide, please. So the cost reduction that we've put through, which has led to about GBP 11 million of run rate cost savings on a run rate basis is the result of removing some of the inefficiencies that have inevitably been introduced as we built up the business quite rapidly in the 2019 to 2022 period as our revenues increased dramatically. That's come about in terms of efficiency through some moderate restructuring, but also removing some of the suboptimal performers across the firm. So we've reduced our roles by about 10%. So the number of staff positions has gone down by about 30 compared to the end of the previous financial year in September last year. Next slide, please. In fixed income, the SKY Harbor acquisition added a third group of funds and teams to assets or capabilities that we bought -- brought into the business in 2018 with the Pax World acquisition in the U.S. and then more recently, last year, 2024 with the acquisition in Denmark of Absalon Corporate Credit. So the GBP 1.1 billion that SKY Harbor is managing is now included across our firm, but was not included in our March AUM update because it was closed in April. What we've been able to do is add yet more capabilities this time in short duration, short maturity fixed income products with European product structures, use the structures and a nicely diversified client base, and that adds to our product range, which are the 2 investment grade or core plus in the U.S. and high yield and emerging markets corporate debt in Europe with our Danish team. So in fixed income, we are expecting to build this business organically, but also open to other acquisitions and opportunities arise. Next slide, please. In private markets, our focus at the moment is on private equity. Our investment strategy is focused on investing with developers of new assets who have got the opportunity to develop and build assets, which we then sell with a view to making a capital gain. So that's a strategy we've run successfully since 2005. We are on the investments of Fund IV at the moment as it says on that chart. And with Fund III, we are making good progress in exiting the investments in order to return capital and gains to our LPs. So based on the outlook for this area and the expansion plan, then there's preparation underway for new products. Next slide, please. So moving now to the financials. I'm just going to go through this at a reasonably high level and happy to come back in Q&A if you want the details. So I think the financials in terms of P&L have reflected in the AUM change that I've just demonstrated, I gave you the highlights at the start of the period. So adjusted operating profit and EPS down as a result of revenues dropping in spite of cost savings and interim dividend and a share buyback program as announced earlier. Next slide, please. So this is the breakdown of the revenue performance on the left, which effectively reflects the AUM waterfall that I was showing earlier. And you can see there the marginalized annual run rate of -- sorry, the annualized marginal run rate of GBP 126.3 million, which will be the full year effect at the end of the period, GBP 76.5 million being the revenue for the half year. With the loss of the St. James's Place mandate at a very low fee, that's actually pushed up our run rate margin from just less than 45 basis points to just over 47 basis points for the period. And as on the bottom right there, nearly 50 basis points run rate at the end of March. Next slide, please. So operating expenses shown here on the left, this is the effect of operating cost reductions cumulatively in the half year rather than looking at the run rate, which is in the circle at the bottom there. So you can see GBP 55.9 million of operating expenses for the half year, but a run rate of GBP 98.5 million annualized, so quite considerably less than double the first half. The personnel changes broken down a little bit more detail on the top right. We haven't yet by the end of March, terminated all the positions. So there's a little bit of a lag effect there from the 30 redundancies that I referred to earlier. And then a bit more detail on the breakdown of the cost reductions in the bottom right. So we are continuing to maintain a healthy spend on IT and communications as part of our outsourcing and digitalization programs. Next slide. So put those 2 together and you get the picture for profit and margin. So the operating margin for the period, 26.8%, down from 32% for the prior 6-month period. And you can see the trend there on the right of the chart. Next slide, please. So capital allocation policy, I went through the highlights of this at the start, but essentially, the core priority here is to invest in our potential as a firm. There's lots of scope to grow both organically, getting new products seeded and ready for our sales teams to promote and also to potentially buy additional businesses and boutiques as we've done successfully over the last 6 to 7 years. The dividend is a key part of Impax's proposition to shareholders, and we are not changing our policy, 55% or more of adjusted profit after tax is the policy. We're looking for a sustainable level, and we're therefore guiding to the lower end of this range for financial year 2025 and also rebalancing the split so that the interim is a higher percentage of the total. And then with the share buyback program, we've picked GBP 10 million for share buyback amount because we felt that was large enough to be meaningful, double-digit millions, if you like, but not so large that it would constrain our investment opportunities. So that is a one-off and should be concluded by calendar year-end. Next slide, please. So dividend history for the last 5 years or so is shown here. We've been paying dividend actually since 2008 and 4.0p per share is a bit down on the 4.7p from the interim of last year. We've guided that the full year final year will mean a total dividend for the year will be at the lower end of the 55-plus range. Next slide, please. So meanwhile, our equity position remains very strong. So we've got a capital surplus of just over GBP 60 million at the end of the period in March, and that's well resourced to facilitate our buyback program. Within the GBP 60 million -- GBP 63.1 million, we've got about GBP 16 million of investments in our own funds, which is all capital that's earning a return. And in the case of all the listed equity, seed investment is readily turned into cash if we need it. Next slide, please. And then finally, the outlook statement. So I think the Impax business, which has been around for a quarter of a century, has really started to prove itself as a set of investment opportunities, which asset owners around the world can commit to, to generate attractive medium- to long-term investment outperformance. There have been quite significant headwinds in market structures for the last year or 2 years, but those do seem to be behind us and our outperformance has returned, which is generally a leading indicator of flows in our experience. So we are indicating that there will be new accounts landing with us with institutional investors before the end of the financial year on the 30th of September, those are being contracted at the moment. Meanwhile, we are looking around for attractive investment opportunities around acquisitions and focusing on our cost base and efficiency where a little bit more we can do there, but it's a nice way of sort of consolidating the expansion in the last 5 or 6 years or so. So in summary, the global leader in this area of investing, which is increasingly showing great signs of medium- to long-term investment outperformance that Impax is in a strong competitive position. We're in a strong financial health and with a capital allocation policy that reconfirms our historical dividend policy and also adds a buyback program. We think we're trying very hard to use our capital resources as a firm for the best interest of shareholders. So I think that's where I'd like to pause and happy to go to questions now. So just go to the format I can see questions as they come in.

Yes, that's great. [Operator Instructions]. I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed via Impax's dashboard. Ian, as you should now be able to see, we have received questions throughout today's presentation, and thank you to the investors for submitting those. Ian at this point, what I'll do is I'll just hand back to you to run through the Q&A, and I'll pick up toward the end.

Great. Okay. So first question, which is put in before the presentation today. So this is directed at me. I think you mentioned at the AGM that you hoped to win new mandates in the fourth quarter before the end of September. Is this still the case? Well, yes, as I mentioned, that is still the case. We have confirmed in the results just now or the last week that the mandates would be landing. So we're not giving any details beyond that, but there will be new business landing before the end of September assuming the contracts get signed, which we're very confident they will. Second question also directed at me. So what are you going to do to get back on the front foot with regard to asset gathering to replace SJP and BNP Paribas AUM losses? Well, we are always on the front foot. We have 100 people in our sales and marketing teams and a number of distribution partners around the world who are promoting our services, if you like. The reason that we've had outflows is because of the very unusual, if not unprecedented market concentration for the last couple of years, which now does appear to be behind us. So I think the main thing to do to attract new capital is just to point out the buying opportunity that there is now in our portfolios that are trading at pretty attractive multiples in terms of value to demonstrate that the tailwinds around the growth of the areas that we're investing in are pretty strong. There are some headwinds, for example, from policies in the U.S. about offshore wind, meaning that we're having to steer away from exposure to the offshore wind sector at the moment, but there's plenty of other things to invest in. And then looking also at new areas for expansion. So the fixed income expansion that I mentioned, the new products, for example, our social media strategy, which we launched just over a year ago and our emerging markets product, which we launched at the back end of last calendar year that I referred to in the slides. So that's the third element to the new products. So let me just scroll down so I can read the next question. The following question with the significant slide in AUM were the exits of a particular thematic investor or type of investor, type of exposure geographically. Sorry, I'm just trying to get my head around that one. So I think the question is just to give a bit more color about the breakdown of the AUM fall, whether it was thematic investor clients leaving and where was the geographic exposure. So I think slide to some degree, covered this. So we -- the big standout drop in the AUM was St. James's Place. There was some drop -- notable drop in Asia from a couple of accounts leaving the Asia Pacific region, which was just part of the natural cycle of institutions coming and going, although there's one particularly large client that was paying a very low fee that made the numbers quite high. The wholesale accounts that we run, for example, for BNP Paribas are ultimately driven in terms of flows by a combination of, in some cases, gatekeepers recommending different asset allocation or individual decisions by family groups or individual investors without any steer to advisory rather than discretionary. So I would say that the period that we've just been through, there was less interest in money market funds, but to start with a lot of interest in fixed income. So that meant that money kept on leaving equity mandates at a lower rate than in the previous 6- and 12-month periods. Asset owners generally don't invest thematically as a kind of as a priority, but some of them are looking at core satellite type structures, in which case Impax's strategies may well fit into a satellite arrangement, and that was the case for both incoming and outgoing institutions during the period. So I hope I covered that question adequately. Next question. Can you expand on what you currently find attractive in building a fixed income portfolio going forward? And what are you hoping the portfolio will look like when you achieve further acquisitions? I think the opportunity here from a global perspective, competitive perspective is to cement and build on our position as having successfully integrated the sustainable economy thinking into fixed income risk analysis. So for example, the analysis of the risk around weather-related disruption to supply chains or impacts on property or assets given specific locations, for example, in flood prone areas and storm prone areas like the coast of the U.S. would be a good illustration. So this is an area where we've been carefully building up a differentiated story, if you like. And so that's how we're going out to the market at the moment to say that we're doing something that's a bit different to the average fixed income investor. That is a story which -- or an edge, which is particularly appropriate and relevant in the corporate fixed income space. And so that's the bulk of our assets under management at the moment rather than government bonds. And so that's where we see the growth in the future. And that will both be in investment-grade bonds and sub-investment grade bonds, for example, in the high-yield sectors, short duration or not duration specific. So the foundation that we have at the moment is that we've got investment-grade product in North America, but not in Europe. We've got high-yield product in both geographies. So there is a medium-term plan or aspiration to have an investment-grade product focused on Europe. We would also be open through acquisition to bringing on board new teams to bring in new capabilities, for example, in areas like private credit and/or multi-asset credit. So not a specific shopping list at the moment, but we're open to new ideas and teams who are perhaps interested in the conversation for joining up. See there's another question come in. Is Impax open to a possible bid or merger? Well, we have a -- I think, a distinctive investment idea, and we are seen by our clients as global leaders in that area. We do believe that we've got strength in the 3 components of investment management, which is investment skill, distribution and the plumbing or corporate services that stitch everything together. So there's no strategic logic in our view to be combining with anything else. But what we have been doing successfully since 2018 is absorbing other groups with assets under management starting in the U.S. with the Pax World acquisition in 2018. So I think rather than being a target ourselves, we see ourselves as very capable at identifying and transacting successfully on acquisitions of other groups and building ourselves up that way. So that's the plan going forward. We've got a balance sheet which is big enough to do that at the scale that we think is appropriate. We don't want to be integrating with anything that's too big because otherwise, it's very good risk that the cultural mix won't work, and we'll lose staff. Incidentally, large-scale M&A is also frowned on in our client circles. And so we've been very careful to reassure current clients when we've been making these acquisitions that there is a very clear focus on stability and corporate culture and making sure that we've got remuneration right just to make sure that clients don't get unnerved. If we were to be absorbed by another firm, then I think there will be a high risk that key staff would leave, and that would mean that clients would leave and destroy value. So it's another dynamic. I think I've come to the end of the list of questions that have been posted. So happy to hang on for a bit if there's anything else that you'd like to...

Well, Ian, as you say, I think you have answered all the questions. And of course, the company can review any further questions that get submitted today, and we can publish those responses on the Investor Meet Company platform. But just before redirecting investors to provide you with their feedback, which is particularly important to yourself and the company. Ian, could I just ask you maybe for a few closing comments?

Yes, sure. Actually, I've just seen this one, hopefully -- not hopefully, but there's one final question, which I've just noticed. So I'll just do that and then I'll summarize the closing remarks. So AUM inflows are projected to return in 2026. That's on a net basis. What gives you confidence that this will happen? Well, I think the experience of running this business over a long period of time through the growth trajectory is that the asset community -- asset community does respond to turnaround in investment performance relative to generic benchmarks. And so as I've said a couple of times already, the fact that we're now nicely ahead of generic benchmarks to the end of April and into pretty much the end of May means that, that's a strong indication to prospective investors and clients that the investment area that we're in is, if you like, turning the corner. And although there's no guarantees that, that will continue, this has historically been a good sign that investment alpha is returning. So that's the most solid indicator of why inflow should become net inflows over the next period. We're not indicating or signaling exactly when that's going to happen. But I think the analysts who cover our stock are expecting that to materialize in the next financial year starting the 1st of October. Okay. So just to conclude, thank you very much for listening. But hopefully, I've been able to give an update to those of you who've seen us before as to how the firm has been doing. It's been a tricky period for relative investment performance and flows, but our investment thesis remains very attractive and with over 80 institutional accounts and more than 200 institutional investors who are behind us and countless number of retail investors, there's a very nicely diversified client base at Impax. We have strong presence and attractive product in 3 major asset classes and great medium-term growth potential. And with management owning just over 20% of the business, there's a very strong alignment between the management team here and external shareholders. We are very focused on shareholder returns and that's another strong indicator of why we've been looking at this here cost and efficiency, which has meant that we've mitigated to a significant degree, the pain of losing assets under management in the last few months. And meanwhile, we've continued to invest in the business with the acquisitions closing and new products launched. So it's been a tricky time for everybody in financial markets in the last few months. We're not out of the woods yet in terms of the uncertainty of the U.S. policy. But I think when everything does calm down again, Impax will continue to be in an excellent position with a very good track record and a team that's very much focused on delivering shareholder value. So thank you again for joining, and look forward to seeing you next time.

That's great. And thank you once again for updating the investors today. Can I please ask investors not to close this session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This is going to take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Impax Asset Management Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.